The Income Tax Appellate Tribunal, Mumbai, has clarified that interest income earned by a co-operative society from deposits with co-operative banks qualifies for deduction under Section 80P(2)(d) of the Income Tax Act, 1961. This decision reinforces the principle that co-operative banks retain their identity as co-operative societies for the purposes of inter-society investment benefits, resolving a recurring dispute in cooperative taxation.
Background & Facts
The Dispute
The dispute centers on whether interest income earned by New Satara Zilla Nagrik Multi State Multipurpose Cooperative Society Ltd (the assessee), a co-operative credit society, from deposits placed with co-operative banks qualifies for deduction under Section 80P(2)(d) of the Income Tax Act, 1961. The Revenue contended that such income should be taxed under the head "Income from Other Sources" and is ineligible for deduction, arguing that co-operative banks are distinct entities not covered by the scope of Section 80P(2)(d). The assessee, however, maintained that co-operative banks are "co-operative societies" under Section 2(19) and thus the interest earned from them is eligible for deduction.
Key Facts
- The assessee is a co-operative credit society registered under the Co-operative Societies Act, engaged in providing credit facilities to its members.
- During the assessment year 2023-24, the assessee earned interest income of Rs. 9,02,49,103/- from deposits with various banks, including co-operative banks and scheduled/nationalised banks.
- The assessee claimed deduction under Section 80P(2)(d) for interest earned from co-operative banks and under Section 80P(2)(a)(i) for interest from scheduled banks.
- The Assessing Officer disallowed the entire deduction under Section 80P, treating all interest income as "Income from Other Sources".
- The Commissioner of Income Tax (Appeals) (CIT(A)) allowed deduction under Section 80P(2)(d) for interest from co-operative banks but disallowed it under Section 80P(2)(a)(i) for interest from scheduled banks.
- The CIT(A) recorded that the deposits were made for business necessity and liquidity purposes, not as idle surplus funds.
Procedural History
- 03.12.2025: CIT(A), National Faceless Appeal Centre, Delhi, passed order allowing deduction under Section 80P(2)(d) and disallowing it under Section 80P(2)(a)(i).
- 21.05.2026: Hearing held before ITAT Mumbai.
- 27.05.2026: Judgment pronounced by ITAT Mumbai.
- The Revenue filed appeal against the CIT(A)’s allowance of deduction under Section 80P(2)(d).
- The assessee filed cross-appeal against the disallowance of deduction under Section 80P(2)(a)(i).
- The Tribunal noted that an identical issue had been decided in the assessee’s favor for earlier assessment years by a coordinate bench of the Tribunal.
The Parties' Positions
For the Revenue
- Argued that co-operative banks are not "co-operative societies" within the meaning of Section 80P(2)(d) and are excluded by Section 80P(4).
- Relied on Totgars Co-operative Sale Society Ltd. to contend that interest from bank deposits is not attributable to the primary business of lending to members.
- Asserted that Section 80P(4) bars all co-operative banks from claiming any deduction, implying they cannot be treated as eligible counterparties for deduction purposes.
For the Assessee
- Contended that co-operative banks are "co-operative societies" under Section 2(19) and therefore interest earned from them qualifies under Section 80P(2)(d).
- Relied on a prior coordinate bench decision in its own case for earlier years, which had upheld the deduction.
- Emphasized that Section 80P(4) only disqualifies co-operative banks from claiming deduction in their own hands, not from being eligible payers of interest to other co-operative societies.
- Cited Jagannath Co-operative Credit Society Ltd. (ITA No. 7449/Mum/2025) to support the claim for deduction under Section 80P(2)(a)(i) for interest from scheduled banks.
Relief Sought
- The Revenue sought to disallow the deduction of Rs. 9,02,49,103/- claimed under Section 80P(2)(d).
- The assessee sought allowance of deduction under Section 80P(2)(a)(i) for interest earned from scheduled banks, arguing that the deposits were made for business liquidity and were not surplus.
The Legal Issue
The central question was whether interest income earned by a co-operative society from deposits with a co-operative bank qualifies for deduction under Section 80P(2)(d), and whether Section 80P(4) operates to exclude such income from eligibility.
Arguments Presented
For the Appellant/Petitioner
The Revenue contended that co-operative banks, despite being registered under the Co-operative Societies Act, are distinct financial institutions and should not be treated as "co-operative societies" for the purpose of Section 80P(2)(d). It argued that Section 80P(4) explicitly excludes co-operative banks from claiming deduction, and by implication, such entities cannot be considered eligible counterparties for deduction purposes. The Revenue relied on the Supreme Court’s decision in Totgars Co-operative Sale Society Ltd. to assert that interest from bank deposits is not attributable to the primary business of a co-operative society and must be taxed under "Income from Other Sources".
For the Respondent/State
The assessee countered that Section 80P(2)(d) uses the phrase "any other co-operative society", and co-operative banks are unequivocally "co-operative societies" under Section 2(19). It emphasized that Section 80P(4) only bars co-operative banks from claiming deduction in their own capacity - it does not negate their status as payers of interest to other co-operative societies. The assessee relied on a prior coordinate bench decision in its own case, which had consistently upheld the deduction, and argued that the facts were identical and no new legal or factual distinction had been raised.
The Court's Analysis
The Tribunal began by examining the statutory language of Section 80P(2)(d), which permits deduction of interest income derived by a co-operative society from its investments with "any other co-operative society". It noted that Section 2(19) of the Income Tax Act defines "co-operative society" as a society registered under any law relating to co-operative societies, which includes co-operative banks registered under the Co-operative Societies Act.
"The exclusion contemplated under section 80P(4) merely disentitles a co-operative bank from claiming deduction under section 80P in its own hands and does not operate as a restriction upon another co-operative society claiming deduction in respect of interest received from such co-operative bank."
The Tribunal held that Section 80P(4) is a self-contained exclusion - it prevents co-operative banks from availing the benefit of Section 80P themselves, but does not alter the legal identity of co-operative banks as co-operative societies for the purpose of being recipients or payers of interest under other subsections. The Revenue’s argument that Section 80P(4) implicitly excludes co-operative banks as eligible counterparties was rejected as a misreading of the statutory scheme.
The Tribunal further affirmed that the prior coordinate bench decision in the assessee’s own case for earlier assessment years was binding under the principle of consistency and parity. The Revenue failed to bring any contrary binding precedent or distinguish the facts of the current year.
Regarding the assessee’s cross-appeal under Section 80P(2)(a)(i), the Tribunal acknowledged the CIT(A)’s finding that deposits were made for business necessity and liquidity. However, it noted the absence of a specific finding on whether such deposits formed part of the circulating capital or were integrally connected to the business of lending to members. The Tribunal declined to decide the issue on the record and remanded it to the Assessing Officer for fresh examination.
The Verdict
The Revenue’s appeal was dismissed. The Tribunal upheld the deduction of interest income earned from co-operative banks under Section 80P(2)(d). The assessee’s cross-appeal regarding interest from scheduled banks was partly allowed: the matter was remanded to the Assessing Officer to determine whether the deposits with scheduled banks were made out of business necessity and formed part of the circulating capital. If so, deduction under Section 80P(2)(a)(i) shall be allowed. The Tribunal directed that its findings apply mutatis mutandis to other assessment years pending before the Tribunal.
What This Means For Similar Cases
Co-operative Banks Are Valid Counterparties for Section 80P(2)(d)
- Practitioners may now confidently claim deduction under Section 80P(2)(d) for interest earned by co-operative societies from deposits with any co-operative bank registered under state co-operative laws.
- The distinction between "co-operative bank" and "co-operative society" under Section 2(19) is legally irrelevant for deduction purposes - the latter includes the former.
- Revenue authorities must cease disallowing such deductions on the ground that co-operative banks are "financial institutions" outside the scope of Section 80P(2)(d).
Section 80P(4) Is Not a Barrier to Deduction by Other Societies
- Section 80P(4) is a self-exclusion clause - it does not restrict the ability of other co-operative societies to claim deduction for interest received from co-operative banks.
- This interpretation ensures parity in inter-cooperative financial transactions and supports the cooperative ecosystem.
Fresh Examination Required for Scheduled Bank Interest
- For interest from scheduled or nationalised banks, practitioners must now gather and submit evidence demonstrating:
- The deposits were made to meet statutory liquidity requirements
- The funds were part of the circulating capital
- The deposits were integral to the core business of providing credit to members
- Mere assertion of "business necessity" is insufficient; documentary proof (e.g., liquidity management policies, balance sheet analysis, board resolutions) is required.
